Customers Are Now the Biggest Fraud Threat to Merchants—How to Fight Friendly Fraud

Reviewed by Mayer Hyman, Payments Specialist | Reviewed for accuracy July 2026

Key Takeaways

• 64% of merchants report rising first-party misuse (friendly fraud), with a quarter seeing increases of 25% or more (Merchant Risk Council, 2026 Global eCommerce Payments and Fraud Report).
• More than 83% of enterprise merchants say friendly fraud has increased over the past three years, and 74.4% now call it a moderate-to-significant business concern (Chargebacks911, 2026 Chargeback Field Report).
• Unlike stolen-card fraud, friendly fraud disputes are decided by the card networks and issuing banks — not the merchant — which is why documentation and timing matter more than intent.
• Pre-dispute alert networks (Visa’s CDRN/RDR, Mastercard’s Ethoca) let merchants intervene before a dispute becomes a chargeback, often resolving the issue without a formal loss.
• For the broader cost of fraud and chargebacks across categories, see our companion piece on what growing companies need to know about the true cost of fraud and capital efficiency.

What Is Friendly Fraud?

Friendly fraud — sometimes called first-party misuse or first-party fraud — happens when a legitimate cardholder makes a purchase, receives the goods or service, and then disputes the charge with their bank instead of contacting the merchant. The transaction itself was never fraudulent in the traditional sense; there’s no stolen card number, no identity theft. The “fraud” is in the dispute: the customer either misrepresents what happened (claiming non-delivery, a defective product, or an unauthorized charge) or simply uses the chargeback process as a free, no-questions-asked return.

The term “friendly” is misleading. For merchants, these disputes are anything but friendly — they carry the same fees, reserve holds, and network penalties as fraud committed by criminals, but the merchant usually has weaker grounds to fight them because a real purchase did occur.

Why Friendly Fraud Keeps Growing

Friendly fraud isn’t a pandemic-era anomaly that faded with supply chains recovering — it’s a structural feature of card-not-present commerce that has kept climbing year over year. Several forces feed it:

• Dispute filing is easier than a return. Most banking apps let a cardholder file a dispute in a few taps, often faster than locating a merchant’s return policy or waiting on customer service.
• Digital goods and subscriptions are hard to “return.” When there’s no physical item to send back, cardholders increasingly default to disputing rather than requesting a refund.
• Chargeback abuse has become normalized. A growing share of consumers view disputing a charge as a legitimate alternative to a return, not as fraud — even when they intend to keep the product.
• Merchants report the trend is accelerating, not stabilizing. The Merchant Risk Council’s 2026 report found 64% of merchants seeing increasing first-party misuse, with a quarter of them reporting jumps of 25% or more year over year (MRC, 2026).

Among large merchants specifically, the trend is even sharper: over 83% of enterprise merchants say friendly fraud has risen over the past three years, and nearly three-quarters now rate it a moderate or significant concern (Chargebacks911 2026 Chargeback Field Report, based on a survey of 250+ merchants). That study is vendor-produced rather than independent research, but the direction is consistent with the MRC’s larger, independently fielded sample of 1,278 merchant professionals across 37 countries.

How Merchant Liability Actually Works

The single most important thing to understand about friendly fraud is that merchants don’t get to decide these cases. Once a cardholder disputes a charge, the claim moves through the issuing bank and the card network’s rules — Visa, Mastercard, Discover, and American Express each run their own dispute framework with its own reason codes, timelines, and evidence requirements. The merchant’s role is to respond with documentation inside a fixed window; the issuer (and, on escalation, the network) decides the outcome.

This matters because it reframes the merchant’s job. You’re not trying to prove the customer is lying — you’re trying to give the issuer enough evidence (proof of delivery, IP and device data, communication logs, matching billing descriptors, terms-of-service acceptance) that the dispute doesn’t qualify as a valid chargeback under the network’s own rules. Weak or late evidence loses by default, regardless of what actually happened.

This is also where the real cost of friendly fraud extends past the refunded amount. A won or lost dispute affects a merchant’s chargeback ratio, which card networks monitor directly — cross too high a ratio and a merchant can be placed into a monitoring program with additional fees, or in the worst case lose processing privileges. That downstream risk is a large part of why prevention and fast response matter more than fighting every case individually.

Early Intervention: Stopping Disputes Before They Become Chargebacks

The best chargeback is the one that never becomes one. Both major card networks operate pre-dispute alert and resolution tools that notify a merchant the moment a cardholder contacts their bank — before the dispute is formally filed as a chargeback:

• Visa’s CDRN and RDR (via Verifi) flag pending Visa disputes and, for enrolled merchants, can auto-resolve qualifying low-value or rules-matched disputes with an automatic refund — closing the loop before it counts against the merchant’s dispute ratio.
• Mastercard’s Ethoca Alerts notify enrolled merchants within hours of an issuer receiving a dispute, typically giving a 24–48 hour window to refund the transaction or supply information that resolves the cardholder’s confusion directly.

These tools work because a large share of “friendly fraud” isn’t malicious — a cardholder forgot they subscribed, didn’t recognize a billing descriptor, or a family member used the card. A same-day refund or a clarifying message resolves that instantly, at a fraction of the cost of fighting (and possibly losing) a formal chargeback. Machine-learning-based risk scoring layered on top of these alert networks can also flag accounts with a disproportionate dispute history, so merchants can require additional verification — or decline — before the sale completes rather than after.

Building Better Dispute Evidence

When a dispute can’t be resolved pre-chargeback, the outcome comes down to evidence quality. Networks generally weigh:

• Proof of fulfillment — tracking numbers, delivery confirmation, signed receipts, or (for services) login and usage logs tied to the account.
• Clear communication trails — customer service tickets, emails, or chat transcripts showing the merchant was responsive and the customer’s stated reason for disputing doesn’t match the record.
• Matching transaction details — billing descriptor consistency, IP/device data, and AVS/CVV match results that tie the order to the legitimate cardholder.
• Policy acceptance — timestamped proof the customer agreed to the return, refund, or subscription terms at checkout.

Assembling this evidence after a dispute lands is far harder than having it ready by design. Order confirmation emails, delivery tracking, and terms-of-service timestamps should be captured and retained automatically at the point of sale, not reconstructed under a response deadline.

Return Policy Design Also Plays a Role

Counterintuitively, a stricter return policy doesn’t always reduce disputes — it can increase them. Research from the University of Texas at Dallas found that lenient return policies increase purchase intent, and that the longer a customer holds onto a product, the less likely they are to return it — a behavioral pattern known as the endowment effect (UT Dallas, Naveen Jindal School of Management). A customer who feels boxed out by a rigid return window is more likely to skip the merchant entirely and go straight to their bank. A clear, easy, well-publicized return process gives frustrated customers a path that doesn’t involve a dispute at all.

Building a Friendly Fraud Response Strategy

Because merchants can’t eliminate friendly fraud, the realistic goal is to shrink its cost and frequency:

• Enroll in pre-dispute alert networks on both Visa and Mastercard rails so early intervention is possible regardless of which network a customer’s card runs on.
• Automate evidence capture at checkout, fulfillment, and delivery so a dispute response package can be assembled in minutes, not days.
• Make support easy to reach so a confused or frustrated customer contacts the merchant before their bank.
• Monitor dispute ratios by network, not just in aggregate, since Visa and Mastercard evaluate merchants independently and have different monitoring thresholds.
• Segment repeat offenders using dispute history data to apply extra verification or decline future orders from accounts with a pattern of disputes.

None of this makes friendly fraud disappear. But it moves the fight to the stage where merchants have the most leverage — before a dispute becomes a chargeback decided by someone else’s rulebook.

Frequently Asked Questions

Is friendly fraud actually illegal?

In most cases it violates the cardholder agreement and, depending on intent and jurisdiction, can meet the legal definition of fraud. In practice, card networks and issuers rarely pursue cardholders criminally for a single disputed transaction — the cost falls almost entirely on the merchant through the chargeback process.

What’s the difference between friendly fraud and a legitimate chargeback?

A legitimate chargeback involves an unauthorized transaction — a stolen card or compromised account the cardholder had no part in. Friendly fraud involves a cardholder who made or authorized the purchase but disputes it anyway, whether due to genuine confusion, dissatisfaction, or intentional misuse of the dispute process.

Can merchants ever win a friendly fraud dispute?

Yes, but success depends entirely on evidence quality and timing. Merchants who can show proof of delivery, clear communication, and terms acceptance within the network’s response window have a real chance. Missing the deadline or submitting incomplete documentation usually means an automatic loss regardless of the facts.

Do chargeback alert tools like Ethoca and Verifi cost merchants money?

Yes — these are paid services, typically priced per alert or as a percentage of resolved disputes. The cost is generally weighed against the combined cost of chargeback fees, lost goods, and dispute-ratio risk, which is often higher than the alert fee itself.

How is friendly fraud different from the general cost of fraud merchants face?

Friendly fraud is one specific category within the broader fraud and chargeback landscape. For a wider view of how fraud, processing fees, and slow settlement affect a merchant’s bottom line, see our related article on the true cost of fraud and capital efficiency for growing companies.

What can merchants do right now to reduce friendly fraud losses?

Enroll in both Visa’s and Mastercard’s pre-dispute alert programs, automate evidence capture at checkout and fulfillment, and make it easy for customers to reach support directly instead of their bank. These steps address the majority of preventable friendly fraud cases without requiring a full fraud-platform overhaul.

Friendly fraud isn’t going away, and it isn’t a symptom of any one economic moment — it’s a permanent cost of doing business online. Merchants that treat it as a structural risk, with the right tools and evidence practices in place before disputes happen, consistently come out ahead of those still treating each chargeback as a one-off surprise. Cartis Payments works with merchants to integrate pre-dispute alert networks and chargeback management tools into their existing payment stack — reach out if you want a second look at how your current setup handles first-party disputes.